The Sports Authority's new $275 million term loan "B" fell under par on heavy trading after the credit was downgraded soon after it broke last week. The deal hit the secondary market at 100 1/2 but later fell to 99 1/2 after Moody's Investors Service downgraded the term loan to B2 from B1 because of a $50 million increase to the term loan, resulting in higher leverage at company. A dealer said trading was heavy on the credit with about $10-20 million of paper trading daily since its break.
Bank of America leads the deal, which backs Leonard Green & Partners' leveraged buyout of the company for $1.34 billion. The credit line includes a $750 million asset-based revolver. The trader added that the deal also has a bad structure, which he said could also explain the deal's poor performance in the secondary market. He said the asset-backed revolver has a call on the best assets at the company, resulting in poor collateral coverage for the term loan.
Before the deal was increased in size, Moody's calculated the transaction value represented a multiple of roughly 7.2 times reported EBITDA for the fiscal year ended Jan 2006. Funded leverage would have been 6.5 times, with a fully drawn revolver increasing this to 7.32 times. Because of the increase to the term loan, as well as a $25 million cut in an equity contribution from Leonard Green, funded leverage increases to 6.7 times, with a fully drawn revolver increasing this to 7.8 times. The agency said the ratings reflect the limited levels of free cash that it expects the company to generate over the next two years. It added the term loan has an inferior collateral position in the form of a second lien on accounts receivable and inventory. Calls to Thomas Hendrickson, cfo of The Sports Authority, as well as a spokesman at Leonard Green, were not returned.